There is one ETF in the market that was designed for exactly this moment in time, the passing of the most sweeping tax reform in decades. It’s the U.S. Tax Reform Fund (TAXR), offered by issuer newcomer EventShares.
The small, young fund that launched this past October, seems to be hitting a chord—albeit small—with investors in the past week, who poured $7.5 million in assets into this fund in one day, according to Bloomberg data. That’s a huge number for a $15 million fund.
The catalyst for this new interest in such a small, niche-y strategy is the tax reform. And TAXR certainly has a unique approach to capturing the changes in the tax code.
Both the U.S. House of Representatives and the U.S. Senate last week approved a massive tax overhaul thought to be good news for companies in general. Among the many changes to the tax code, the new law puts corporate tax rates at a universal rate of 21% beginning in 2018. Currently, the highest corporate tax rate is 35%.
‘Best 40 Ideas’
That lower, single rate means more cash at hand for companies, and it could translate into a boon for many businesses. TAXR focuses exclusively on that opportunity set, offering a portfolio of 40 stocks the issuer calls its “best 40 ideas” on who’s to benefit most from tax reform in 2018.
TAXR, which is actively managed, can go both long and short any companies the portfolio manager sees as likely to benefit—or suffer—from tax changes. But the current mix is 100% long-only. “There’s a cost to shorting, and when tax reform goes through there’s going to be a strong tailwind behind the market, and shorts aren’t going to work really well for you,” said Ben llips, EventShares’ chief investment officer.
Following last week’s tax reform passage, TAXR’s portfolio managers added nine companies and removed three. Since its inception on Oct. 17, TAXR is up 7.24% compared to the SPDR S&P 500 ETF Trust (SPY).
Chart courtesy of StockCharts.com
Among the additions are companies like Red Rock Resorts; barge operator Kirby Corp., energy firm Concho Resources; E-Trade and Dave & Buster’s. Some of the deletions were companies replaced by similar competitors of higher quality, according to Phillips.
- First, the eclectic mix of names, in a way, reflects the portfolio managers’ response to investor demand for more diversification within the portfolio.
- Secondly, the security selection doesn’t impact the fund’s sector allocations meaningfully, preserving industrials as the sector leader at about 28% of the mix, and adding slightly to utilities and financials. Each security in the mix carries an equal weight of 2.5%.
- Third, this is not a once-and-done rebalance following the passage of the bill. Tax-reform effects come in waves over time, and the portfolio will be constant looking to capture beneficiaries.
“This rebalance will keep looking for ‘second order’ and ‘third order’ effects from tax reform such as consumer spending and M&A activity, all of which could be included the portfolio down the line,” Phillips said, noting that it will probably take a round of better earnings prints before Wall Street reacts and stock prices rise.
The next round of rebalancing—scheduled to take place quarterly, but at the manager’s discretion—will look at how these companies have been reinvesting the cash stemming from lower taxes. “We’ll look for companies that are putting the money to the best use,” he noted.
- Finally, TAXR has a value tilt at heart. The portfolio ultimately is a mix of 40 companies the manager believes have strong fundamentals; stand to gain the most from tax cuts; and offer attractive valuations. The portfolio’s P/E is about 20.
“We are active managers and fundamental investors, so we want to own good companies with good fundamental value stories that have this embedded tax reform catalyst,” Phillips said.
TAXR has an expense ratio of 0.85%, or $85 per $10,000 invested.
Contact Cinthia Murphy at [email protected]